Reference no: EM13492578

1. "The following methods can be used to reveal non-use values" (circle all that apply)

a. Travel cost models
b. Hedonic price models
c. Contingent valuation

2. Clorox lowers the price of its GreenWorks

TM bathroom cleaner. All other things remaining the same, choose how you think this would affect the demand for Pine-Sol in the market. (Circle one).

a. It will shift the demand of Pine-Sol upward because they are substitute products
b. It will shift the demand of Pine-Sol upward because they are complement products
c. It will shift the demand of Pine-Sol downward because they are substitute products
d. It will shift the demand of Pine-Sol downward because they are complement products

3. Moving from an economically inefficient to efficient allocation of resources will necessarily increase benefits by more than costs.

a. True
b. False

4. There are two demand curves for a private (i.e. normal consumption) good: P=50-q1 & P=50-2q2. Let Q=q1+q2 be the total quantity demanded on the market. The equation for the total (market) demand is

a. P=50-3/2*Q
b. P=100-3*Q
c. P=50-2/3*Q
d. P=50-3*Q

5. When considering benefits and costs that occur at different points in time, there is no need to use discounting if the project occurs over a time period without inflation.

a. True
b. False

6. A team of researchers conducts a travel cost study of recreational visits to Grand Teton National Park in Wyoming. In addition to uncovering the marginal benefit to visitors from a given number of trips, the researchers also considered how the population of bighorn sheep affects the marginal benefits from visitation. This study reveals an annual demand curve for visits to the park as follows: Price = 10,000 - 10*NumberOfTrips + 50*AvgNumSheep, where AvgNumSheep is the average number of sheep seen by a typical visitor per day.

a. Assuming that an increase in the local population of bighorn sheep increases the average number of sightings, how does an increase in the sheep population affect the marginal benefits from park visitation (circle one: increase/decrease)?

b. Assume the average person sees 2 sheep per day. Graph the demand function for the number of trips to the park below. If the park charges an entrance fee of $100 per visitor, how many visitors do you expect?

c. Calculate the consumer surplus for the number of visitors and the entrance fee described in b).

d. Suppose that overgrazing at the fringes of the park and diseases from livestock drive the population of sheep to a level where the average visitor no longer sees a sheep at all. Calculate the new consumer surplus of visitors and the lost benefits to consumers (assuming the entry fee remains the same) from the reduced sheep population relative to the baseline level in c).

e. Suppose the sheep population can be restored to its former level at a cost of $40,000 per year. Is this investment justifiable based on the lost "use value" you calculated in d) alone?

7. The demand curve for gasoline is P = 300 - 10*Q.

f. Find the elasticity of demand for a quantity of 12. Does this number imply that quantity demanded is sensitive to price changes or insensitive?

g. Suppose the current market clearing quantity sold is 12. The government is considering implementing an increase in the gas tax on each unit of gasoline to raise additional revenue. Assume that any change in the tax is passed on entirely to consumers in higher gas prices. Is an increase in the gas tax justified on the basis of raising revenues?

8. National Marine Fisheries Service is considering closing a large area of federal waters to fishing in Alaska due to negative interactions of fishing with endangered Steller sea lions (due to capturing of seals in fishing gear and catch of the prey species of the sea lions by fishermen). In doing this, the closures are expected to displace 30 vessels from fishing in the Aleutian Islands, each of which made profits of $110,000 on an annual basis from fishing in these waters. Best estimates are that all 30 of these vessels will find employment in alternative fisheries, but these fisheries will be less profitable - yielding profits of only $50,000 per vessel each year.

a. Calculate the annual cost to the entire industry from the closures.

b. Assuming a 10 year planning horizon (t=1,...,10), calculate the present value of these costs using a discount rate of r=.04. Assume that all profits are earned at the end of the year so that the first year's costs are discounted.

c. At the end of a 10 year period, it is estimated that the closures will result in a growth in the population of Steller sea lions of between 100 and 1000 individuals. Combining this information with your findings in part b, come up with a lower and upper bound for what society would have to be willing to pay per additional sea lion produced by the closure (in period 0 dollars) to overcome these costs.

d. Suppose a stated preference study reveals that the average American is willing to pay a sufficient amount such that when added up over the population, the willingness to pay per sea lion saved exceeds the upper bound you derived in part c. Is it the case that the fishery closure is justified on the grounds of economic efficiency? (Hint: What if there are other ways of achieving the same biological objective?)

9. In your own words, explain why the equimarginal principle (marginal benefits = marginal costs) is often synonymous with the definition of economic efficiency (maximizing net benefits).